It is oftentimes desirable to determine the value of a contingent claim that may be exercised at some time in the future. While contingent claims frequently occur in the financial arena, contingent claims also arise in a number of other, non-financial contexts in which the benefit and/or cost of an asset may not be traditionally monetary. As an example, a contingent claim may come in the form of an option or opportunity to make a resource commitment that may or may not have a long-term beneficial payoff, such as an investment in new technology to improve the performance, capability or characteristics of a new good, service, event or the like. This type of option may be referred to as a performance option.
Unfortunately, the contingent claims that arise in these non-financial contexts may be more difficult to evaluate than the contingent claims that arise in the financial context since the underlying assets in these other contexts are not traded or valued by a well established market, such as the stock market in the financial arena. Furthermore, valuing the contingent claim is subject to the risk perception of the participant. The risk perception arises when the participant anticipates receiving less, or more, from the original investment than could be expected based a risk-neutral evaluation of the circumstances. The adjustment for risk perception subtly changes the value, or worth, of the contingent claim to the participant such that the participant is only willing to invest or commit resources up to and including a risk-adjusted amount for the contingent claim.
Regardless of the type of contingent claim, it may be desirable to determine the risk-adjusted, perceived value of an asset, and in particular the value of the contingent claim, at the present time. By determining the value of the contingent claim, the participant can avoid overpaying for the asset as a result of an overvaluation of the contingent claim. Conversely, the participant can identify projects or assets in which the value of the contingent claim has been undervalued and can give strong consideration to investing in these projects or assets since they likely represent worthwhile investment opportunities. And although techniques have been developed for determining the value of a project or an asset having a contingent claim at one or more subsequent times, it is usually desirable to improve upon existing techniques.